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A founder wants to become a limited partner in a venture fund. What to know?

Understand your tolerance for risk and do your homework, says Maynard Webb in his weekly advice column.

A founder wants to become a limited partner in a venture fund. What to know?
[Source images: airdone/iStock; sam74100/iStock]
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Editor’s Note: Each week Maynard Webb, former CEO of LiveOps and the former COO of eBay, will offer candid, practical, and sometimes surprising advice to entrepreneurs and founders. To submit a question, write to Webb at dearfounder@fastcompany.com.

Q. I have an opportunity to become a limited partner in a venture fund. How should I think about what percentage of my portfolio to put into funds that invest in startups versus standard investments such as index funds?

— Founder who sold a company

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Dear Founder, 

Congrats, it sounds like you are in a great position. 

I’m glad to hear that you are giving this necessary thought and attention. You’ll find that it takes as much work to manage and grow what you’ve made as it took to make it in the first place. That’s why so many lottery winners end up losing their windfalls.

As for answering your question about how to allocate your portfolio, it all depends on your risk profile. It’s really a matter of risk appetite and diversification. I have what I call the “fortress,” which is what will provide for me no matter what.  That is in a mix of traditional stocks and bonds managed by my finance team.  Most of everything else is in higher risk/higher reward opportunities like venture funds, private equity, and the Webb Investment Network, which I created as a vehicle to invest in startups.

I strongly recommend that you bring in professional financial advisers to help you, but remember that even if hiring very good people from very reputable places, you still have to stay on top of this effort. You have to know what the strategy is and pay careful attention to ensure their strategy and interests are aligned with what you want.

I started the Webb Investment Network for many reasons, the least of which was making money, but being able to benefit from the outsize returns that many startups achieve turned out to be nice. However, startup investing is very risky. 

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An opportunity to be a limited partner in a good VC fund is rarified air. These funds are oversubscribed and there are many more investors who want to get in than can. Look at the historic returns to see how it as performed and if things check out make it a part of your investment strategy.